Are Discretionary Bonuses Really Discretionary?

For some years, employment law in Connecticut has seemed to make a clear distinction between bonus plans that are discretionary, and plans that guaranteed payment of a bonus if specified performance criteria were met. In a pair of decisions interpreting Connecticut’s wage payment statutes (Connecticut General Statutes sec. 31-68 and 31-72), the Supreme Court of Connecticut held that bonuses are not wages if payment is within the discretion of the employer, including being dependent on factors other than the employee’s performance (such as the employer’s overall profitability).  The cases are Weems v. Citigroup, Inc., 289 Conn. 769 (2008) and Ziotas v. Reardon Law Firm, P.C., 296 Conn. 579 (2010).

Similarly, it had seemed for years that the law concerning commission payment plans was also well settled: commissions plans were contracts, and could be pretty much what the employer and employee agreed upon.  For example, a commission plan could legally contain a provision making payment of a commission contingent on the employee remaining employed until a certain point in time, such as the sale being invoiced or payment on the sale being received.  If the employee quit or was terminated prior to that point, no commission payment was due, even though the employee had completed all the work required to earn the commission.  This might not sound like a good bargain, but it was considered to be the bargain that the employee had made when taking the job.

But in a case called Geysen v. Securitas Security Services USA, Inc., 322 Conn. 385 (2016), the Connecticut Supreme Court decided that there could be some circumstances in which a commission would have to be paid, in spite of plain language to the contrary in the commission plan.   The Court based its ruling on a legal principle known as the implied covenant of good faith and fair dealing.  Under this principle, every contract implies a duty that neither party to the contract will act in bad faith to impair the right of the other to receive the benefit of the bargain. Therefore, if the employer terminated the employee before a commission was due to be paid for the purpose of depriving the employee of the commission, the employer would violate the covenant of good faith and fair dealing, and could be held liable for damages.

Now a recent decision in the Hartford Superior Court has taken this principle and applied it to a discretionary bonus program.  In Anderson v. Hartford Financial Services Group, Inc., plaintiff sued to collect a bonus payment that had been denied to her. The employer’s written bonus plan was replete with references to discretion and other disclaimers of any guarantee of payment.  The plan said that bonus awards were based on management’s discretion, that awards could be adjusted or eliminated completely, that awards were entirely discretionary, that eligibility to participate in the bonus plan did constitute a guarantee of an award, that the company retained full control and complete discretion over all bonuses decisions, and on and on in a similar vein.

This language was enough to persuade the Court that the wage payments statutes did not apply to the bonus program.  However, the plaintiff argued that because she had performed well and because the bonus pool was funded, she had a reasonable expectation of receiving the same bonus that she had received in prior years.  Since the bonus plan was a form of contract to which the implied covenant of good faith and fair dealing applied, the Court ruled that  the plaintiff could proceed to trial on a claim that her employer had an improper motive for denying her a bonus, and had therefore breached the covenant of good faith and fair dealing.

Of course, employers should continue to use appropriate language in discretionary bonus plans (and in commission plans as well) to make the terms and limitations of the plans clear to employees.  An employee seeking to contest the denial of a discretionary bonus still has a heavy burden of proof that the employer acted in bad faith, which the courts have defined as a sinister motive or dishonest purpose.  However, instead of prevailing simply because the bonus plan states that bonuses are discretionary, employers may have to demonstrate that a decision to withhold a bonus was not the product of an improper motive.